How to write the loan application when applying for a business loan.
You should pay special attention to writing your loan application because it is going to be the foremost instrumental in getting you approved for the business loan from the lender.
You should consider your loan application as an advertisement and promotion for your business to the business lender. Think of it as publishing an ad that your lender is going to read, and approve or disapprove of your business loan based on information in it.
Your loan application should clearly state the long-term profit-making potential of your business that tells the lender that you will be able to pay back the money that you borrow as a loan.
Your application should convince the lender of your managerial ability and the fruitfulness of striking a long-term and profit-making business partnership with you and your enterprise.
Banks and commercial lending institutions need evidence of security, stability and business potential before the make the business loan. You can ensure that your application speaks about your business in such a form by staying both realistic and optimistic in stating the facts.
You should always stick to stating the facts on your loan application. This is even true of for a person who is just starting up with a business venture. If you anticipate the sales between $50,000 to hundred thousand dollars, base year income projection on an average figure of $75,000.
It is also very important to make sure that your business loan application is complete. When some information is missing from your many bankers will assume that either the information is being hidden on purpose application, or the business owner doesn’t know his own business well enough to put the required information together.
There are 12 separate items that are usually included in every business loan application. The importance and length that each section takes will depend upon the kind of business you are running, your industry, and the amount that you are borrowing.
Sections Of a Business Loan Application
- Cover sheet.
- Cover letter.
- Table of contents.
- Amount and use of loan.
- History and description of business.
- Functions and background of your management team.
- Market information on your product and service.
- Financial history and current status.
- Financial projections to demonstrate that the loan will be re-paid.
- A list of possible collateral.
- Personal financial statements.
- Additional documents to support the projection.
Think of this as the title of your business loan application. All it needs to contain is your name, name of the business and the name of the lending institution that you’re submitting the business to. It should also include your business cell phone number and the date on which the application is being submitted.
The cover letter is a personal letter to the bank asking them to consider your application for business loan. This letter usually should not exceed one page and also describes your business in general such as whether it is a partnership or corporation, in manufacturing, distributing or retail business and what type of goods or services you provide. You should include just a few lines in order to give an idea of what your business plan is.
Table of Contents
This section is a summary of all topics contained within the business loans application according to page numbers, so that the banker can easily find the information chronologically or otherwise listed, as well as the documents included.
Amount and Use of Business Loan
As we have said, business loan approval also depends upon the purpose for which it is being sought. The tenure of the loan usually depends upon this fact. For example if the loan is for the purchase of a new piece of machinery, it could be up to 7 to 10 years. If it is for the purchase of real estate, the loan could extend as much as 20 years. If it is for meeting business expense, then it can be as short as 4 months.
Whenever you seek a business loan for a particular purpose, show the contract price, cost of freight and installation and all other amounts that will contribute to the amount you require. In the end you should clearly state the amount of money you will be providing from your own resources and the balance you are seeking to borrow.
History and Description of Your Business
Describe your business in greater detail in the section. You spoke about your business briefly in the cover letter now speak at length about the conformity of business, why the new monetary influx is going to be profitable etc. Speak about the future plans of the business. It is essential to stick to the facts and only state those matters that can be justified and proved with documents and statistics.
The lender will also like to know about the people at the helm of the business and in charge of running it. Your managerial team is likely to be your most valuable asset and pivotal in the success of the business. It could be several employees in key positions, it could be just you or one more person or it could even be other consultants such as accountants, bankers and lawyers. In one or 2 pages you should list each person’s name and responsibility. Where appropriate and if to the betterment of your application, you can describe the background of a person in an important position and why he is ideally suited for the job.
In this section you should give a complete description of your product line of service as well as the target market. Give details about how you are going to target your market and any future clients you already have for introducing new products and services.
Most bankers want to see balance sheet. and the income and profit and loss statements. If you are a business startup you have to use projections which the bank will compare to the norms in your industry.
This section includes 3 sets of documents, a projected income statement, balance sheet and cash flow statement. These statements tells the bank how the business intends to use the loaf and how it can generate short sale profits to pay off the loan. In most circumstances you will need the assistance of your business accountant to prepare these documents.
In most circumstances you will have to use the collateral as security in order to get a business loan. This collateral can include your personal assets such as your stock, including loan on your home or a personal loan. The collateral used can also be that of the business such as the inventory, accounts receivable, business machinery and equipment etc.
As a business startup you are going to find specially difficult to get an unsecured loan without using any collateral security. Almost all lending institutions want a secondary method of payment to recover the loan in case the business owner happens to the default. Each collateral you are going to use should be described in detail, with a fair market value.
Personal Financial Statements
As a startup a bank or lending institution will want to know about your personal net worth. They will also want to know what personal guarantee you can offer in order to secure the business loan from them. In order for them to be able to gauge your personal net worth, they will want to see your tax return and balance sheet. Many banks offer a preprinted forms that make listing these figures relatively easy.
This section should include all of the documents that can further enhance your chances of qualifying for a business loan. For example if you have a new sales contract on a piece of equipment or lease on any location that has the potential of growing your business revenue, you can include it in this section.
In case you have plans to introduce a new product or service you can include a product brochure and additional market-research information as well. This section can be especially important to new business startups who do not have a track record. You can even include assurance and feedback from one of your major customers to give the bankers an idea of the value of your business and it’s potential for growth.